By Uwe E. Reinhardt
Health Affairs, November 2011
Abstract
In developed nations that rely on multiple, competing health insurers — for example, Switzerland and Germany — the prices for health care services and products are subject to uniform price schedules that are either set by government or negotiated on a regional basis between associations of health insurers and associations of providers of health care. In the United States, some states — notably Maryland — have used such all-payer systems for hospitals only. Elsewhere in the United States, prices are negotiated between individual payers and providers. This situation has resulted in an opaque system in which payers with market power force weaker payers to cover disproportionate shares of providers’ fixed costs — a phenomenon sometimes termed cost shifting — or providers simply succeed in charging higher prices when they can. In this article I propose that this price-discriminatory system be replaced over time by an all-payer system as a means to better control costs and ensure equitable payment.
http://content.healthaffairs.org/content/30/11/2125.abstract
Comment:
By Don McCanne, MD
This is an important contribution to the health policy literature. It is intended to be a seminal paper designed to displace the useless discussion of cost shifting between public programs and private insurers with a discussion of reducing price discrimination (charging individuals, private insurers or government programs different prices for the same services) by shifting to an all-payer system that would better control costs and ensure equitable payment.
An all-payer system simply establishes “uniform price schedules that are either set by government or negotiated on a regional basis between associations of health insurers and associations of providers of health care.”(1) Why is this important?
Although there is considerable variation in prices throughout the health care system, high prices, on average, have been a major contributor to our very high per capita spending on health care.(2) As Uwe Reinhardt explains, much of this excessive pricing has resulted from private insurers, with a weak market presence, negotiating with health care providers, especially hospitals, that dominate their respective markets. The health care provider consolidation that is taking place can only compound the impact of this market distortion.
Although private insurers also are consolidating, competing plans are still not in a position to extract major price concessions from dominant health care providers. All-payer price setting through government or association negotiation is designed to displace the ineffectual private insurers as price negotiators while establishing both better cost control and more equitable payments for health care.
(In some areas, private insurers have been able to hold prices down at Medicare rates for physicians where the physicians have a very weak negotiating clout. This is less true of hospitals that have a weaker clout.)
Price discrimination – charging different prices for the same services – hits especially hard those who have the weakest bargaining power: individual patients who are now bearing more of the costs of health care. Contrary to widely held ideological beliefs, here it is price discrimination in the private insurance market and not the government that has created the perversity of rationing based on the ability to pay.
In his article, Reinhardt explains, “It should be recognized that the higher the fraction of health care spending that individuals and families must bear out of their own resources, the more heavily the model relies on rationing health care by price and the patient’s ability to pay — that is, rationing by income level. It may surprise some readers that anyone would associate markets with rationing. But as economists tell their students, free markets represent just one of many styles of rationing. Relying on price and ability to pay is precisely how markets in general manage to ration scarce resources among unlimited ends.”(1)
One of the reasons that this article on all-payer systems is so important is that we are at a crossroads in the reform process. He writes, “At this time, the US health system appears to stand at a clearly delineated crossroads. On one road, Americans would seek better control over national health spending through an all-payer system, such as the one operated by Maryland for the hospital sector. On the other road, Americans would seek better control of health care prices and national health spending through greater reliance on market forces for most of the health system. Depending on how that road is traveled, it could entail more pronounced rationing of health care by income class, meaning less health care for those who cannot afford it. The battle over US health policy in the coming decades is likely to be over which road to take.”(1)
Since an all-payer system would correct only a portion of the flaws in our health care financing, why shouldn’t we go full bore and enact a single payer system? Reinhardt brings up the political feasibility argument, as follows, “In any event, an all-payer system with multiple private insurers would be likely to be more broadly politically feasible than a government-run single-payer system, such as Canada’s provincial, government-run single-payer insurance systems. A single-payer system, of course, would be another alternative that would eliminate price discrimination and any cost shifting.”
Reinhardt discusses the effectiveness of all-payer for hospitals in the state of Maryland. In a previous response to the Maryland all-payer system, I stated, “If we can succeed in reestablishing a public service role for government, then wouldn’t it be reasonable to simply enact an all-payer system for hospitals? The problem is that it only makes one change in our fragmented, dysfunctional system of financing care, and not a complete change at that. Under all-payer, only the rates are controlled, but each service still must be accounted for and paid for independently, and the hospitals would still have multiple public and private payers with which they would have to interact.”(3)
So what about Switzerland? Reinhardt mentions it as having successfully applied an all-payer system. In another previous message on the OECD/WHO report on Switzerland, I stated, “It is not clear why so many in the U.S. are enamored of the Swiss health insurance system when this OECD/WHO report confirms that it is highly inefficient and fragmented, with profound administrative waste, inequitably funded, with regressive financing and with wide variations in premiums, has the highest out-of-pocket costs, has an increasing prevalence of managed care intrusions, and is controlled by a private insurance industry that has learned how to game risk selection at significant cost to those on the losing end.”(4)
Uwe Reinhardt is to be highly commended for moving us in the right direction, but…
We’ve said it before and we’ll say it again. If political feasibility is the barrier to enacting a single payer system, let’s not simply jettison single payer; let’s change the political feasibility instead! All-payer might be a modest incremental improvement (modest when compared to what needs to be done), but why settle for that when we can have it all through an improved and expanded Medicare for all?
(1) http://content.healthaffairs.org/content/30/11/2125.full
(2) https://pnhp.org/docs/Its-The-Prices-Stupid.pdf
(3) https://pnhp.org/news/2011/september/hospitals-all-payer-or-global-budgets
(4) https://pnhp.org/news/2011/october/oecdwho-report-on-the-swiss-health-system